You are here

Home

Wealth

The “haves” and the “have nots” — the tension between these classes has endured as long as society itself. We are naturally fearful of inequality in the distribution of wealth, human capital, and political influence. The reason is these operate as power factors, which can deprive us of our freedom. The ancient Greeks were afraid of the rich and protected themselves by using a lottery and developing democratic institutions to diminish their power.

 

Politicians today appeal to the “have nots” by demagogic pandering. In doing so, they unwittingly preach for the elimination of our democracy. The redistribution of wealth always defeats the wealth-creating machine and lays the foundation for tyranny. Experience tells us that taking from the rich and giving to the poor will never work because, when we change the system to do this, the system that generated the wealth in the first place disappears. Ludwig von Mises said:

 

What is most criticized in our social order is the inequality in the distribution of wealth and income. There are rich and poor; there are very rich and very poor. The way out is not far to seek: the equal distribution of all wealth.

 

The first objection to this proposal is that it will not help the situation much because those of moderate means far outnumber the rich, so that each individual could expect from such a distribution only a quite insignificant increment in his standard of living. This is certainly correct, but the argument is not complete. Those who advocate equality of income distribution overlook the most important point, namely, that the total available for distribution, the annual product of social labor, is not independent of the manner in which it is divided. The fact that that product today is as great as it is, is not a natural or technological phenomenon independent of all social conditions, but entirely the result of our social institutions. Only because inequality of wealth is possible in our social order, only because it stimulates everyone to produce as much as he can and at the lowest cost, does mankind today have at its disposal the total annual wealth now available for consumption. Were this incentive to be destroyed, productivity would be so greatly reduced that the portion that an equal distribution would allot to each individual would be far less than what even the poorest receives today.

 

The inequality of income distribution has, however, still a second function quite as important as the one already mentioned: it makes possible the luxury of the rich.

 

Many foolish things have been said and written about luxury. Against luxury consumption it has been objected that it is unjust that some should enjoy great abundance while others are in want. This argument seems to have some merit. But it only seems so. For if it can be shown that luxury consumption performs a useful function in the system of social cooperation, then the argument will be proved invalid. This, however, is what we shall seek to demonstrate.

 

To form a correct conception of the social significance of luxury consumption, one must first of all realize that the concept of luxury is an altogether relative one. Luxury consists in a way of living that stands in sharp contrast to that of the great mass of one’s contemporaries. The conception of luxury is, therefore, essentially historical.  Many things that seem to us necessities today were once considered as luxuries…. The luxury of today is the necessity of tomorrow. Every advance first comes into being as the luxury of a few rich people, only to become, after a time, the indispensable necessity taken for granted by everyone. Luxury consumption provides industry with the stimulus to discover and introduce new things. It is one of the dynamic factors in our economy. To it we owe the progressive innovations by which the standard of living of all strata of the population has been gradually raised.

 

Most of us have no sympathy with the rich idler who spends his life in pleasure without ever doing any work. But even he fulfills a function in the life of the social organism. He sets an example of luxury that awakens in the multitude a consciousness of new needs and gives industry the incentive to fulfill them.

 

Richard Epstein, professor of law, put it another way: “One of the fundamental mistakes of the egalitarians is they’re so interested in trying to minimize differences that they don’t understand the completely adverse effects that it has on the size of the pie.”

 

Current Distribution of Wealth and Income.

One can begin by asking, what is the distribution of wealth and income in America. Professor G. William Domhoff, Sociology Department, University of California, published a paper on the subject. He shows that in 1983, the top 20 percent of households owned 81.3 percent of the wealth, leaving the bottom 80 percent owning 18.7 percent. By 2007, these numbers were 85.1 percent and 15 percent, respectively. Interestingly, the top 1 percent in 1983 had 33.8 percent of the wealth and by 2007 had 34.6 percent of the wealth. In other words, there has not been much change over the past thirty years.

 

From a more historical point of view, the top 1 percent had 36.7 percent of the wealth in 1922 which increased to 44.2 percent by 1929 and then decreased to 27.1 percent by 1949. The percentage inched up to 34.4 in 1965 and then hit a low in 1976 of 19.9 after which time it hit a high of 38.5 percent in 1995, only to decrease to 34.6 percent in 2007. These are just percentages, and, in all likelihood, the people within these percentages change every day.

 

In 2000, Switzerland’s top 10 percent held 71.3 percent of the wealth, and the United States was second with 69.8 percent.  Denmark, France, Sweden, the United Kingdom, and Canada were in the range of 53 to 65 percent with Germany at 44.4 percent.

 

Economists have generated a Gini coefficient, which allows them to compare income inequality. A Gini coefficient of zero means everyone has the same income, and a Gini coefficient of one hundred means one person in the country has all the income.  The United States is ninety-fifth out of 134 countries studied, meaning thirty-nine countries have more income inequality. Sweden has a Gini coefficient of 23, Canada of 32.1, the United Kingdom 34, Egypt 34.4, India 36.8, China 41.5, Russia 42.3, and the United States 45.

 

Interestingly, Professor Domhoff concluded that higher income taxes are not particularly progressive, that the more wealth one has, the more power he has, and that transfer payments are slightly more effective than taxes in generating more equality of income, but neither one has a material effect. For example, IRS records show that there are 235,000 taxpayers who earn over $1 million per year and who collectively earn $726 billion per year. Assuming they pay 15 percent of this in taxes, there remains $617 billion to be taxed. If all of this were taxed, it would cover the federal government’s $4 billion daily deficit for 154 days, a little over five months. Can we suppose these 235,000 people would work as hard the next year as they did the year they made $726 billion and paid all of it to Uncle Sam?  What does it tell us when our allegedly responsible leaders want to raise taxes on the rich?  This can have no rational appeal but certainly foments the visceral envy the poor have for the rich, the same envy Moses warned us about 3,500 years ago.

 

Does Inequality in Wealth and Income Affect the Quality of America?

Unanswered by Professor Domhoff is the more important question which is whether more equality in wealth and income will make a better America. For an answer to this question, one can read numerous economic abstracts, which circle the problem but generate no particular answers. We suppose there is a balance that ensures the preservation of harmony and which also diminishes the collective fear of centralized power in the few and increases the incentives to work and to create wealth and better our lives and others. However, in a changing world, this balance likely changes every day in one direction or another.

 

From a longer term point of view, one can observe from the economic abstracts that in the mid-1950s America’s success was attributed to the accumulation of capital. Later, economists wondered whether the capital was accumulated because of inherited English institutions and Protestant beliefs. Others wondered, since the Pilgrims and their progeny were largely equal, each having to work to survive, whether the general equality among them in wealth and income provided the stimulus that generated American growth. This equality, for example, tended to influence more democratic political institutions, more investment in public goods and infrastructure, and institutions that offered relatively broad access to economic opportunity. Other economists have attributed America’s success to its distribution of lands, patent laws, its broad voting laws, and its public education and private banking, which combined to lower thresholds for access to economic opportunities. Other economists have suggested that the availability of commodities predicts the middle class share of income, which in turn predicts development and therefore confirms that high inequality becomes a barrier to development. Other economists are looking at the long-term effects that historic events can have on current economic development and have concluded that history really does matter since it reflects all of the cultural, geographical, and weather conditions as of a period of time.

 

In a copyrighted paper published by the National Bureau of Economic Research, Misperceptions About the Magnitude and Timing of Changes in American Income Inequality,  (Robert J. Gordon, 2009), Professor Gordon, Department of Economics, Northwestern University, concluded that not only had the increase of inequality been exaggerated, but it reversed itself after 2000. He stated:

 

The rise of American inequality has been exaggerated in magnitude, and its impact is now largely in the past.  Standard commentary laments the slow growth of median real household income and concludes that over the past three decades (1979 — 2007) the gap between growth of income and productivity has been 1.46% per year. But this “conventional” gap measure is riddled with measurement and conceptual inconsistencies. Our “alternative” gap measure grows at only 0.16% over the same period, only 1-10th as rapidly as the conventional gap, and it does not grow at all during the 1979 — 1995 period when inequality was growing fastest. In fact, we show that income-productivity gaps have virtually nothing to do with inequality. The alternative growth gap is zero, when inequality grew fastest before 1995, became negative when inequality grew further during 1995 — 2000, and was strongly positive in 2000 — 2007 when inequality decreased.

 

The most that can be said is that nobody knows what the magic formula is, which means we have a duty to set the available facts before the People and let the voting booth decide what is best for America in terms of issues associated with inequality of wealth and income. So far as we are concerned, as long as the ownership of wealth remains in an envelope of historic changes, there is not likely much to worry about. Although it is acknowledged that the few have more power than the many by reason of this wealth, they have less power in the voting booth, and must behave responsibly and make convincing cases to keep their wealth. This provides incentive to marshal it and invest it wisely. 

 

What about the repeal of the estate tax and taxing the rich?

Some argue for repeal of the estate tax. Others argue to keep it to raise revenue. The issue is whether the government upon receipt of the revenue spend it more wisely than private individuals.

 

Higher estate taxes, with a generous exemption to protect farmers and small businesses, which provide the bulk of employment in America, are not likely to persuade the wealthy to move to other countries if they pay any attention to the Gini coefficient discussed above. Moreover, one has to remember, as with income inequality, that the members of the group who have the most of both change over time and provide incentive to others to transit from lower stations to higher stations on the economic ladder. It might be helpful to condition the repeal of the estate tax on the elimination of the national debt, which would likely give the wealthy more incentive to seek better management of the government rather than more tax breaks. As for the case for repeal, we have seen no evidence that the wisdom of the generation that made the wealth can send the wisdom along with the wealth. Moreover, we believe a case can be made that the money created by increasing the national debt mostly ends up with the wealthy, so it makes some sense to earmark estate tax revenue to eliminate this debt.

 

The only reason to increase the taxes on the rich is the assumption that the rich are not efficiently utilizing the money they have for the benefit of everyone and that the government could do a better job. The assumption continues that the rich are either lazy or poor investors, neither of which comports with the facts. There will always be a cost in terms of economic efficiency in any redistribution or transfer scheme that has to be measured before any of those schemes are formally approved.

 

The shortage of available evidence that extant inequalities of wealth or income are hurting America suggests that rhetoric regarding the “haves” versus the “have nots” is demagogic in character for the purpose of obtaining political power and influence, which has the unintended consequence of diminishing the quality of our government and nation. 

 

Noted philosopher and sociologist, James Q. Wilson, recently said: “It is easy to suppose that raising taxes on the rich would provide more money to help the poor. But the problem facing the poor is not too little money, but too few skills and opportunities to advance themselves.” He also noted that the Gini coefficient in Greece has been falling, thereby reducing income inequality. Yet, we all know what is going on in Greece.

 

The Monopoly Effect

We all know if we play “Monopoly” long enough one person usually ends up with the money. This could be the game but also could be luck or the nature of things. Those who make lots of money are good at what they do and make available their products to the public for a good price. Yet, there is no evidence that what they are good at is passed on to their progeny. As a matter of policy, it is not a good idea to allow wealth to accumulate in a vessel of inferior aptitude, though clearly mismanagement by progeny will cause the wealth to dissipate into the hands of others. The common use of trusts and foundations and the relaxation of the rule against perpetuities are other factors that we defer to another day but that need watching.

 

Matt Ridley in The Origins of Virtue (1996) reminds us that “where authority replaces reciprocity, the sense of community fades” and that growing statism has ruinous consequences. In brilliant prose, he explains how “trust is the foundation of virtue” and implicit in all of the essential cultural attributes of human nature even before governments were established including morality, money, contracts, welfare, and society. The irony is that, as the government grows, the essential elements of community and cooperation diminish. He says, “If we are to recover social harmony and virtue, if we are to build back into society the virtues that made it work for us, it is vital that we reduce the power and scope of the state.”

 

Ridley observed that the division of labor creates efficiency and wealth but also polarizes the people. Ortega y Gasset in The Revolt of the Masses (1932) observed that the specialization associated with division of labor has brought about a “rebirth of primitivism and barbarism.”  The reason:

 

By specializing him, civilization has made him hermetic and self-satisfied with his limitation; but this very inner feeling of dominance and worth will induce him to wish to predominate outside his specialty.

 

Thus, this man, though knowledgeable in his own field, is ignorant of the historical conditions requisite for the continuation of the very civilization that made him knowledgeable in his field in the first place.

 

It is no wonder that man, having satiated himself, has turned to analyzing why his government is no longer acceptable, either because there is not enough freedom or because there is not enough bounty. The question is whether the ruinous consequences of excessive government power occur from excessive private power. Under present-day conditions, the answer seems to be “no.”

 

Conclusion

There is no evidence that lowering the share of income and wealth held by the wealthy would improve the country.  This share has gone up or down depending on the overall health of America and the world.  The people in these percentages change all of the time.  As long as the rich’s share stays within historical envelopes, it would seem the division of wealth reflects human nature and the natural inequality in people.  One thing is clear:  the rich are better managers of the wealth they have than the government and, as long as this is true, the resulting benefits accrue, directly or indirectly, to all Americans.

A